Herbert Smith Freehills | 23 May 2025

Guatemala found liable for not protecting hydroelectric project from violent protests

Earlier this year, a split ICSID Tribunal composed of Diego Fernandez Arroyo (Chair), Guido Santiago Tawil, and Raul Vinuesa found Guatemala liable to pay USD 68.5 million in damages plus interest to Panamanian company Energia y Renovación Holding (ERH) for having failed to protect a hydroelectric power plant project from attacks by protesters while dismissing the investor’s expropriation claim. The majority found that, despite promoting and authorising the project, the Guatemalan state did not allocate enough resources to ensure the project’s physical safety in the face of significant and repeated attacks on the facility and its personnel by hostile local groups. This was despite ERH’s repeated requests for increased protection and police presence in the region.

Background

In 2013, ERH started developing two power plants and a transmission line in the Huehuetenango region of Guatemala. Soon after, in 2014, armed groups attacked the facility, set a camp on fire, destroyed machinery, and assaulted personnel. These attacks intensified in the following years, reaching critical levels in 2017. ERH argued that, in light of the attacks, it repeatedly requested the intervention of the Guatemalan state to ensure the project’s safety, but that the state failed to fulfil its obligations which, in turn, resulted in a total loss of ERH’s investment.

The arbitration was brought under the Central America-Panama Free Trade Agreement of 2002 (the FTA), which contains a ’full protection and security’ provision. This provision requires the host state (in this case Guatemala) to protect investors and investments from the actions of private parties. This standard can be violated through both the action and inaction of the host state. In this arbitration, the focus was on Guatemala’s inaction.

The Tribunal’s Decision

RH argued that Guatemala failed to meet the ’full protection and security’ standard by (inter alia) failing to devote sufficient resources to protecting the project. Guatemala argued that the degree of protection that a host state is obliged to provide is contingent on its resources and level of development (and therefore that Guatemala did not breach the standard). However, ERH successfully argued that Guatemala had the resources to protect its investments but chose not to deploy them sufficiently, and that in any case the use of the word "full" in the relevant provision of the FTA committed Guatemala to a higher standard of protection.

Guatemala argued that ERH had full knowledge of the security conditions in the Huehuetenango region and of the state’s limited control over the region yet chose to invest there at its own risk. Accordingly, it would have been unreasonable for the state to devote further resources to protect the project. The majority of the Tribunal (Messrs. Fernandez Arroy and Tawil) disagreed, noting that Guatemala’s argument was "much less credible if one bears in mind that the project was promoted and authorised by the state." (Award, ¶ 327). Instances such as the state granting construction permits and environmental licences, and tendering contracts for the distribution of electricity generated by the project were found to be significant. In the Tribunal’s words, "if the State knew that it did not have effective control over that part of its territory, a fully diligent course of conduct would have meant rejecting the various applications to develop the Project in San Mateo de Ixtatan." (Award, ¶ 328).

ESG considerations, particularly human rights concerns, were central to Guatemala’s defence. The state argued that militarising the conflict with local protesters could have violated the human rights of the indigenous communities in the region, which it is obliged to protect under the Inter-American Commission on Human Rights. While the Tribunal acknowledged this, it concluded that it was unsustainable for Guatemala to argue that it could meet the ’full protection and security’ standard merely through formal actions (e.g., liaising with local authorities, meetings between government entities to coordinate work) without a "material impact on the security situation". The Tribunal noted that Guatemala’s limited actions to protect ERH’s investment lacked such material impact.

Ultimately, the majority of the Tribunal found that Guatemala breached its ’full protection and security’ obligation under the Treaty as well as the ’fair and equitable treatment’ standard. Guatemala’s appointee Raul Vinuesa dissented. In particular, Mr. Vinuesa considered that ERH’s investment had been illegal under Article 123 of the Guatemalan Constitution, which provides that only Guatemalan nationals or companies whose shareholders are Guatemalan can own property within 15 kilometres of Guatemala’s national borders, where the investment in this case was located. Mr. Vinuesa also took the view that ERH’s failure to disclose to the state when it invested in Guatemala that it was a Panamanian company, representing instead that was a Guatemalan-owned company triggered the illegality provision under the treaty. The majority of the Tribunal, however, concluded that Guatemala did not establish that ERH’s representations carried any legal consequences under Article 123 of the Constitution, and emphasized that Guatemala had not initiated any legal action in domestic courts to challenge the investment’s legitimacy pursuant to that provision of the Guatemalan Constitution.

The majority joined Mr Vinuesa in finding that Guatemala’s actions (or inactions) did not constitute an indirect expropriation of ERH’s project and did not breach the FTA’s most favoured nation clause.

Regarding damages, the majority of the Tribunal awarded ERH USD 80.6 million of the USD 131 million it claimed, representing its sunk costs. This amount was then reduced by one-fifth due to the finding that ERH failed to sufficiently mitigate its own loss. In particular, while ERH received USD 4 million in compensation from its insurers, the policy entitled it to USD 20 million, but ERH chose to settle for a lower amount, representing insufficient mitigation of damages. The Tribunal decided to only award sunk costs because it concluded that "the DCF methodology, when applied to the present case, gives rise to a highly speculative result which is totally disproportionate.” The Tribunal explained that “[t]he Project has not reached the operational phase –in reality, the dams are far from being finalised—which means there is no concrete data about its commercial and financial performance" (Award, ¶ 452).

Comment

In recent years there has been an increase in direct action by protesters against extractive and infrastructure projects across Latin America and other markets. The decision of the majority of the Tribunal is significant in this context. The award raises important points about the state’s responsibility under bilateral or multilateral agreements regarding the security of a project after a state has granted the necessary permits and licences.

It remains to be seen how states will assess the permitting of investments by protected investors in reaction to the majority’s analysis in this award. As such, any challenge of the award be closely watched by both investors and governments across Latin America and beyond as states and investors are seeking to achieve a balance between competing imperatives. In this regard, the award will be relevant to the approach that a state should have in policing and restraining physical attacks by activist groups against projects. The majority’s clear acknowledgement that human rights concerns remain important and that the ’full protection and security’ standard must be compatible with states’ obligations to protect human rights is notable.